Retire Comfortably with a Flexible Budget

August 4, 2014

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Retirement planners say you will need at least 70% of
pre-retirement income to enjoy your golden years. Yet recent retirees with less
say they are doing just fine. Three years into retirement, the average
replacement income of people with an IRA or 401(k) plan is just 66% of final
pay, a survey conducted by T. Rowe Price found. Yet more than half say they are
living as well or better than when they were working, and 89% say they are
somewhat or very satisfied with retirement so far.

Such findings belie our widely accepted retirement savings
crisis. The average 50-year-old has put away just $44,000. But
clearly a large subset—those with either a 401(k) plan or IRA, or both—are
doing pretty well. This is the group surveyed by filtering for those retired
less than five years or over 50 and still working.

For years a small band of economists have been making
the case that many people are over saving. They argue that the financial
services industry is essentially scaring people into over saving in order to
collect fees. The fright factor is evident in the T. Rowe Price survey, where
those still at work expressed far more anxiety than those who have reached
retirement and found it to be less financially challenging than they may have
been led to believe.

Recent retirees in the survey have median assets of
$473,000. That includes investable assets plus home equity minus debt. Home
equity is a big part of their holdings at $191,000. They have just 52% of
investable assets in stocks and asset allocation mutual funds, and are playing
it fairly safe with 31% in cash.

How are they managing on pre-retirement income that falls
short of most planners’ models? A third are working at something or looking for
work, and to augment Social Security and pension income they are drawing down
their savings by an average of 4% a year, which is a rate that many planners
consider reasonable.

The real source of new retiree satisfaction may be their
genuine appreciation for a downsized life: 85% say they do not need to spend as
much in order to be happy and 65% feel relieved to no longer be trying to keep
up with the Joneses. In addition, they embrace flexibility with 60% saying they
would rather adjust their spending to maintain their portfolio than maintain
their spending at the expense of their portfolio.